On September 21, 2009 the British Columbia Supreme Court released its reasons for the case of McEachern v. 752265 B.C. Ltd., 2009 BCSC. 1290. The decision raises concern for real estate developers regarding pre-sale contracts and the perceived acceleration of estimated completion dates. Most pre-sale contracts clearly contemplate a delay in the completion date, but developers must now be careful to ensure that, in light of this case, the contractual language in the purchase contracts does not give rise to a contractual right of rescission in circumstances if the estimated completion date for the purposes of the disclosure statements is moved forward.
On November 26, 2007 and January 19, 2008 the plaintiff purchasers (the Purchasers) entered into agreements (the Contracts) with the two numbered companies known as Pulse Development Partnership (the Developer) to purchase a total of 3 condominium units. The disclosure statement (the Disclosure Statement) for this development provided that "Construction is anticipated to commence September 1, 2007 and the estimated date for completion of construction of the Development is December 31, 2009." The Contracts provided, among other things, that:
- "The Completion Date of the purchase and sale of the Strata Lot will take place on the 15th day after the [Developer] notifies the [Purchasers]…that the Strata Lot is, or will within such 15 day period be, ready to be occupied;" and
- "The Contract is terminable at the [Purchasers’] option for a period of 7 days after receipt by the Purchaser of any amendment which materially affects the offering."
On May 12, 2008 the Developer sent a letter and a second amendment to the Disclosure Statement to the Purchasers informing them that the estimated completion date had been changed to April 30, 2009, a nine month "acceleration" of the estimated date. Upon receipt of this information the Purchasers promptly provide a notice of termination to the Developers.
Several days later the Developer sent another letter and third amendment to the Disclosure Statement to the Purchasers advising them that the actual anticipated completion date was September 1, 2009, and that the April 30, 2009 closing date was a mistake. The Purchasers maintained that the Contracts had been terminated and the Developer refused to accept the Purchaser’s termination of the Contracts.
To determine the Completion Date (as such term is defined in the Contracts) under the Contracts, the Developer employed the common practice of providing for a "floating completion date" based on notice from the Developer to preserve its flexibility. Under the terms of the Contracts, if the Completion Date had not occurred by December 31, 2009, either party had the right to terminate the Contracts.
Was the acceleration of the estimated completion date an amendment that "materially affected the offering" thereby giving rise to a contractual right of rescission?
- The acceleration of the estimated date for completion of construction from December 31, 2009 in the original Disclosure Statement to April 30, 2009 in the subsequent amendment represented a material change in the offering despite the Developers’ contention that the date constituted an estimate only and was by its nature subject to change.
- A change is generally "material" where the change would be likely to influence the decision of the purchaser whether or not to enter into the agreement.
- The "notion of ‘materiality’ appears to be a phenomenon falling on a continuum between trivial and fundamental" and the purchaser’s circumstances may be considered when determining the materiality of the change.
- The acceleration of the completion date by 8 months would "materially affect the offering".
- The Purchasers were entitled to terminate the Contracts and to the return of the deposits (based on the terms of the Contracts).
One could simply view this decision as an exercise in contract interpretation given the explicit language of the Contracts in question. Based on the explicit language of the Contracts, the Court determined that the change in estimated date for completion of construction (moving completion up by eight months) constituted an "amendment which materially affected the offering". If that is as far as the decision went there would be no real cause for concern. What is problematic about this decision is the court’s process of analysis in reaching its conclusion. In reviewing the contractual language surrounding the "floating" completion, the court focuses on the Developer’s ability to extend the Completion Date, but supposes that a corresponding right does not exist to accelerate it. There is also much discussion of the plaintiff’s circumstances which culminated in the plaintiff’s assertion that they would not have entered into the Contracts if the Completion Date was earlier than December 31, 2009. The court comes to the conclusion that the true intention of the parties contemplated a scheduled Completion Date of December 2009 with the possibility of delay.
With respect, in our view, unless an additional collateral agreement between the parties fixed such a Completion Date as the estimated date, the language of the Contracts and the Disclosure Statement do not support such a conclusion. As is common in the residential development industry, the Completion Date determination procedure under the Contract was intended to give the Developer the freedom to set the Completion Date by appropriate notice so long as it occurred prior to December 31, 2009. The provision in the Contract permitting termination by either party if the Completion Date did not occur by December 31, 2009 could be interpreted as a fixed "drop dead" date intended to give the contract legal certainty. Again, this is common in such contracts within the development industry. The court goes on to conclude that notwithstanding the express language contained in the Disclosure Statement that the December 31, 2009 date was an "estimated date for completion of construction of the Development", it was "reasonable for the purchasers to rely on the representations (i.e. the estimated date) in the Disclosure Statement as an accurate projection of the Completion Date or, at least, the earliest possible Completion Date". With respect, such an approach is not consistent with the concept of such a date being an estimate and arguably has the effect if used for the purposes of interpreting the contractual rights of the parties of converting a flexible floating completion date into a fixed completion date notwithstanding the express wording of the contract.
While it is completely conceivable that an amendment to a disclosure statement which changes the originally stated estimated date for completion of a project by either accelerating it or delaying it might in some circumstances be considered a material change, it does not necessarily follow that the original estimated date somehow represents the earliest possible completion date and any attempted change of that date to an earlier date should on that basis constitute a material change to the offering. Any reference to a date being a "estimate" should not preclude the actual date occurring before the original estimate. The fundamental issue is whether or not the actual date is materially different from the estimated date that was set out in the original disclosure statement bearing in mind that this date is in fact and estimate.
In the circumstances of this case, the Court’s ultimate conclusion that the change in estimated Completion Date represented a material change to the offering is defencible. However, as discussed above there are concerns arising from the manner in which this conclusion was reached which may raise unnecessary ambiguities.
What should Developers do?
Consider whether these steps might be appropriate for you:
- Evaluate current projects and their respective estimated completion dates.
- Address any discrepancies or anticipated discrepancies between estimated completion dates and revised completion dates.
- Revise standard form contracts of purchase and sale to contemplate both the possibility of accelerating the estimated completion date and of delays.
- Review standard form contracts of purchase and sale for language granting rescission rights to purchasers.
- Build in the ability to both accelerate and delay estimated completion dates in future disclosure statements.